ECB Council member Pierre Wunsch sees continued dangers for consumer prices – including a weaker euro if monetary policy deviates too much from that of the USA.
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(Bloomberg) — Pierre Wunsch, a member of the ECB’s Governing Council, sees continued threats to consumer prices — including a weaker euro if monetary policy diverges too much from that of the United States.
“There remain significant risks regarding the development of wage growth and inflation in wage-intensive services,” said the Belgian central banker, who urged caution even though interest rate cuts are expected to begin this year. “Now is not the time to commit to a predetermined course of action.”
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In his speech on Wednesday at the Center for Central Banking in Frankfurt, Wunsch said that “a known unknown remains the role of the exchange rate and the risk of importing inflation.” Different economic conditions and policies in the euro area and the United States “could have significant implications for the dollar-euro exchange rate,” he said.
ECB officials, including Wunsch, have signaled they will begin cutting borrowing costs at their June meeting after a flurry of interest rate hikes. What happens after that is less clear and more controversial, with many analysts also speculating about how a possible delay in easing in the US will affect the euro zone.
“While monetary tightening has been remarkably synchronous across the globe, easing cycles are unlikely to exhibit similar synchronicity,” Wunsch said.
Although inflation in the 20-nation bloc stalled for the first time this year at 2.4% in April, an underlying measure that excludes volatile items such as energy and food continued to decline. More importantly, service sector inflation slowed after remaining at 4% for five consecutive months.
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Chief economist Philip Lane said on Monday that recent euro area data had made him more confident that inflation would return to the 2 percent target – and called the easing in the services sector “an important first step in the next phase of bringing down inflation.” “.
“Although the outlook remains unclear, I see a path to initiating rate cuts this year,” Wunsch said. The June meeting will “learn more about wage and service dynamics,” he said. But he also reiterated that the ECB will have to make a decision at some point – even if uncertainty remains.
Since there is “no sign of inflation expectations easing in the longer term,” “the costs of easing for too long appear to outweigh the costs of easing prematurely,” he said. In mid-April, he told Bloomberg that the ECB’s decisions would become tougher after the first two interest rate cuts.
Wunsch also called for “some flexibility” to be tolerated in interpreting the 2% inflation target. “This is to avoid mistakes like the decision to expand quantitative easing when inflation forecasts were around 1.8% at the end of 2021,” he said.
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